In part 1 of Safeguarding your portfolio we discussed the importance of revisiting the financing (Capital structure) for your real estate portfolio to ensure that it withstands the storm and that you emerge out of it in a stronger financial position. We highlighted the three core financing areas where you can pivot as an investor: Stability, Agility and Opportunity.
In this article, we shed light on the financing strategies and tools available to you to enhance the agility of your portfolio.
The focus here is to create some wiggle room within your monthly budget.
This includes debt restructuring that is aimed at freeing up cash flow as well as equipping you with financing tools that can help you cover any short-term cash deficits.
The first step in creating capacity in your monthly budget is to make an honest assessment of it and eliminate certain habitual unnecessary spending behaviors that contribute to higher levels of debt. As well, investors must re-visit any fixed costs to see if there is an opportunity to optimize them. During the lockdown, many clients have become conscious of their spending habits. They’ve noticed their overspends as well as places where their spending is wholly unnecessary.
You will be surprised how much you can keep in your pocket every month if you go through the simple discipline of assessing your monthly spend. This does not only apply to your personal spend but also to your business spend (if you are in business) and portfolio monthly expenses (such as insurance).
Once we have gone through step 1, we can then visit the options to consolidate and restructure any expensive debts. Money is very cheap right now. The variable mortgage rates are as low as 1.95 (prime - .50) and there is an opportunity to replace expensive debt with cheaper debt, not only helping you save on interest but also reducing how much you pay every month.
Unsecured lines of credit, RRSP loans, car loans, credit cards are common examples of where expensive debt resides and where your cash flow may be leaking on a monthly basis.
A client of ours had $11,000 remaining on his car loan and where he was paying a fixed installment of $1,100 per month. That is almost a monthly mortgage payment on a small investment property!
Setting up a secured line of credit at prime (2.45) on this client’s primary residence and using some of the funds to pay off this loan resulted in a significant reduction to his monthly cash outflow from $1,100 to $22.45 per month. While this has converted a principal and interest car payment to an interest only payment, it created significant breathing room for the client and also gives them the flexibility to make larger payments as they desire to pay it off but at a lower interest rate. The same concept applies to an RRSP loan that one of our clients has taken. The loan was for $25,000 and was costing him $1,650 per month.
Another strategy to enhance agility is to consider re-amortizing one or more loans. This has to be done selectively as re-amortizing a loan will result in paying additional interest over the new term of the loan. In some cases, you can re-amortize a mortgage or a loan without re-qualifying for it. For example with some lenders: if you had originally registered a 30 year amortization mortgage and over time you brought the effective amortization of the mortgage down to 25 years (through pre payments) , you can simply approach the lender to re-amortize the current outstanding balance back to its original amortization of 30 years, which will reduce the monthly payment.
It is important when working with this strategy to temporarily enhance cash flow to understand the pre-payment options available to you to pay down this loan in a shorter time frame. For example: your monthly payment would have gone down due to re-amortizing back to 30 years but if you choose a bi-weekly accelerated payment, it cuts down the effective amortization by about 4 years.
Debt restructuring tools are powerful, especially during this time. But it is important to utilize them wisely by speaking with an experienced mortgage advisor as there are often tradeoffs.
Dalia Barsoum is president and principal broker at Streetwise Mortgages and a regular columnist for Canadian Real Estate Wealth. She leads an award-winning team of mortgage advisors offering strategic income property and portfolio advice to Real Estate investors across Ontario.
Click here to set up a complimentary planning session with Dalia or Streetwise Mortgage Advisor.
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